KUHN CAPITAL Tuesday, March 20, 2018
Dispatches from the front

The 1,000 Word Picture

We recently ran across a chart that cleanly illustrates what’s been happening to the money traditionally spent by strategic buyers on M&A. Despite miserable money market and bond returns...

it’s not being spent on anything.

The chart, derived from FactSet Fundamentals data, shows the amount of cash held by companies in the S&P 500 Index.

That figure was about $750 billion in mid-2008 when the recession got into gear. Today it’s about $1.3 trillion, nearly double the number. That’s a CAGR of about 11.5%.

Recall that since the recession officially ended, corporate profits are up but employment remains depressed, a so-called “jobless recovery.” What gives? We suspect the reason companies aren’t hiring is the same reason they’re hoarding cash.

We earlier commented on a piece written by Marshall Sonenshine of investment bank Sonenshine Partners. The article -- “The Long Pause: M&A in a Time of Uncertainty" -- caused a bit of a stir when it was published not because of what it said, but because it was said by a creditable writer. His point was that M&A was down because managers lacked “clarity and confidence” about the future. Hoarding cash and keeping a lid on employee staffing are symptoms of that ill-ease.

Sonenshine doesn’t write much about why managers are so risk-averse. But it doesn’t take a lot of imagination to figure out: the current Administration has launched unprecedented government incursions into the free market ranging from ObamaCare, to EPA initiatives designed to cripple the coal industry, to thousands of pages of new regulations targeting the financial services industry, etc. After five years it’s pretty clear: Obama is bad for business.

So under the circumstances, why take chances? Your company or industry may be next. Better to lie low and wait for the threatening clouds to pass.

Expect big chunks of that hoarded cash to be freed at last after the next Presidential election, no matter which candidate prevails.

Ryan Kuhn

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